Analyse: Lyxor ETF Brazil (Ibovespa)

The Lyxor ETF Brazil provides exposure to many of the biggest and most liquid components of the Brazilian equity universe. Brazil has seen remarkable growth over the last several decades, and now ranks as the world’s sixth largest economy. In turn, Brazilian equities have gone from fringe emerging market exposure to an increasingly important part of a globally balanced portfolio. The Bovespa Index is fairly well diversified by sector, but diversification at the company level is limited, with more than 50% of the index within the top 10 firms. Returns from Brazilian equities have been erratic, exhibiting annual volatility of over 30% in the last 15 years. An investment like this therefore requires a lengthy time horizon and a strong stomach to handle the swings. Its correlation to other equity exposures does suggest some benefit as a diversifier. In the same time period it has shown correlation to the local-currency returns of the S&P 500, the MSCI Europe and the MSCI World Index of 66%, 67%, and 72%, respectively. Although some of that benefit looks to have diminished: the corresponding 5-year correlations are 78%, 79%, and 82%.

Fundamentale Analyse

A key driver of growth for the Brazilian economy is energy. The country’s wealth of natural resources has made it a substantial beneficiary of the past decade’s trend towards higher commodity prices. A big part of that trend has been the rapid growth of China, with its seemingly insatiable appetite for raw materials, as well as Malthusian concerns about the world running out of non-renewable resources. The concern right now is that with China slowing down and other parts of the world in recession, the demand for raw materials could fall considerably. Further muddying the picture is the rapid pace of new natural gas discoveries throughout the world, particularly in the United States. Indeed, Brazil’s growth has slowed considerably in recent periods. For the second quarter of 2012, its annualised GDP growth rate was just 1.6%, less than that of the United States. The HSBC Brazil Composite Output Index, which measures conditions in both the manufacturing and services sectors of the economy, was 48.6 in August, where a value less than 50 indicates contraction. In August the president Dilma Rousseff announced plans to privatize a portion of the country’s infrastructure, allowing private firms to bid on projects linked to toll roads, railways, ports and airports. This should help rein in a public sector whose wage bill, according to The Economist, more than doubled in nominal terms between 2003 and 2010. Through a combination of their preferred and common shares, oil giant Petroleo Brasileiro SA Petrobras (“Petrobras”) and Vale, a diversified mining company, make up the biggest chunks of the index. According to Morningstar equity analysts, Petrobras common stock is trading at a 7.7% discount to its fair value estimate, and Vale at a 21.8% discount as of this writing. Long-term performance on Brazilian stocks, as measured by the local currency returns of the Bovespa Index, has been very strong. Over the past 15 years the index has produced an annualised gain of 11.35%, versus 3.06% for the MSCI World Index. It suffered bad losses during the financial crisis, but its peak-to-trough drawdown of 50.5% was not much worse than that for many of the more developed markets. As measured on a similar benchmark, MSCI Brazil, the price-to-earnings ratio for Brazilian equities has rebounded from a low of 4.4 in June 2009 to 10.3 at the end of August 2012. That still puts it well below its five year average of 11.2.

Indexkonstruktion

The Bovespa Index is a total-return index currently made up of 68 securities covering roughly 70% of the capitalisation of the Brazilian equity market. The index aims to reflect the dynamics of the cash market operations of the Brazilian exchange; therefore it is weighted by trading activity during the previous 12 months, as measured by the number and value of trades in a particular security. It is reviewed and rebalanced quarterly. The index is diversified across a number of industries, though it is tilted towards commodities. Together, the Energy and Materials sectors make up about 34% of the total. Financials make up roughly 25%. There is also quite a bit of concentration within the largest companies. Including both common stock and preferred shares, Vale makes up 12.4% and Petrobras 11.3%. The top 10 names in the index make up more than half its total value.

Fondskonstruktion

The fund uses synthetic replication to provide exposure to the underlying benchmark, entering an unfunded swap transaction with counterparty Societe Generale. The fund uses investors’ cash to buy a basket of securities, which is then used as collateral in the swap. Lyxor provides full transparency on the components of the substitute basket, which is made up predominantly of publicly-listed equities. The fund aims to maintain zero counterparty exposure by reviewing the swap on a daily basis and resetting as needed. At the time of writing the fund was over collateralised by 3.08%. Under the terms of the swap, the counterparty agrees to provide the fund with exposure to the total return of the underlying index, net of any associated costs, taxes, or fees. The return from the swap assumes that all dividends paid by the underlying stocks are reinvested in the index. This fund does not pay out any dividend distributions. The fund is domiciled in France and is available in Euro-, U.S. dollar-, and British Pound Sterling-denominated versions. In total it has assets of roughly €520 million.

Gebühren

The fund’s total expense ratio (TER) is 0.65%, which is in line with other funds offering similar exposure. Other costs potentially borne by the unitholder but not included in the TER include swap fees, bid-ask spreads on the ETF, and brokerage fees when buy and sell orders are placed for ETF shares.

Alternativen

For exposure to Brazilian equities there are a number of choices, including Source MSCI Brazil ETF, Amundi ETF MSCI Brazil, iShares MSCI Brazil, CS ETF (IE) on MSCI Brazil, HSBC MSCI Brazil, and db x-trackers MSCI Brazil TRN Index. Of these, the iShares fund is the largest, with assets of $750 million. The Amundi fund has the lowest TER, at 0.55%.